Vale's net profit plunges 84% in second quarter

RIO DE JANEIRO--Brazilian mining giant Vale SA (VALE, VALE5.BR) said Wednesday its net profit plunged in the second quarter as a sharp depreciation in the local currency bludgeoned its financial results while softening commodities prices weighed on cash flow.

Vale also saw its output of the key steelmaking ingredient dampened by an extended rainy season in northern Brazil, where the Carajas mining complex in the Amazon accounts for about one-third Vale's production. Prices for iron ore fell in the second quarter amid concerns about slowing economic growth in China, the world's biggest steel producer.

Vale's net profit sank 84% in the April-to-June period from a year earlier, to $424 million, falling well short of expectations. Analysts surveyed by FactSet had expected the firm to post $2.68 billion in net profit.

Whittling away at Vale's bottom line were massive, "one-off" hits associated with currency fluctuations, as the Brazilian real lost around 10% of its value against the U.S. dollar over the quarter. The currency depreciation caused a $1.96 billion loss in Vale's net financial liabilities and losses of $814 million in forward and swap derivatives, Vale said.

Vale's operating results, which the company says should eventually benefit from a cheaper Brazilian real, also weakened from a year earlier. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, fell 9.8% in the second quarter to $4.96 billion, while operating revenues sank 11% to $11.28 billion.

Lower prices for iron ore, coal and nickel were partly behind those declines. Iron-ore production fell 9.1% to 73.23 million metric tons, because of weather but also project delays in recent years that have prevented Vale from keeping up with steady capacity expansions by rivals such as BHP Billiton PLC (BBL, BLT.LN)and Rio Tinto PLC (RIO, RIO.LN). Both companies posted record iron-ore output in the second quarter.

Vale received an average of $99.21 per ton of iron ore in the second quarter, down 11% from the first three months of the year. The drop reflected a broader trend in the seaborne iron-ore market, which hit a trough in late May as slower-than-expected economic growth in China led steel producers there to draw from stocks.

But the combination of "very low iron-ore inventories," signs of a recovery in housing starts and a slum-renovation program by China's government is "very likely to offset" the effect on the market of a new wave of supply from Australian producers in the second half of the year, Vale said. As a result, prices should continue "hovering around the current level, which is very profitable for a low-cost producer such as Vale."

Vale reported lower costs and expenses in the second quarter from a year earlier, the fruit of a company-wide austerity effort in the face of receding commodities prices. Cost of goods sold, selling, general and administrative expenses, and other expenditures fell 8.6% in the quarter to a total $7.43 billion.

The company downplayed the significance of the decline in net profit, saying financial losses on its second-quarter income statement were a "non-cash effect" and that a weaker Brazilian real could bring down the total investment for its biggest expansion projects.

"This reduced net income doesn't mean that the company is, you know, in a worse situation," Chief Financial Officer Luciano Siani said in a video posted on Vale's website. "It's just an accounting effect."

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